Looking back at the politics of economic transformation, and especially at the privatization of state-owned enterprises, the process was highly politicized and non-transparent. It was accompanied by corruption scandals, clientelism and ethnic-political struggles, characterised by the distribution of power according to the ethnic divisions in the country.

Such an economy has been unable to attract foreign investors and those who came often had political rather than economic goals.

Rapid privatisation was the wrong idea:

Illustration. Photo: Pixabay

The original causes of the unsuccessful privatisation of state-owned enterprises can be traced back to the reconstruction of Bosnia in the second half of the 1990s.

After the 1995 Dayton Peace Agreement, the neoliberal approach of the international community supposed that fast and transparent privatisation of state-owned property would stimulate a dying economy.

Based on the UN High Secretary for B&H’s decision, the United States Agency for International Development, USAID, was chosen as the so-called “leading donor” for privatisation.

USAID supposed that privatisation would bring foreign investment, employment, efficiency, export and innovations.

But this approach suffered from an excessive belief in market mechanisms, and underestimated the fact that the privatization process took place in a post-war environment whose significant specifics shaped the outcome.

In hindsight, USAID and the international community insisted too much on the speed of privatisation, and put significant confidence into the invisible hand of the market.

Unfortunately, privatisation took place without an appropriate institutional and legislative framework, when the banking system, legislation [such as Insolvency Acts] and judicial mechanisms were still in the making.

This created a window of opportunity for ulterior motives. The poor rule of law deterred expected foreign investments, and so the only owners of the much-needed financial capital were the enriched elites, consisting of war profiteers, nationalist-oriented politicians, mafias and remains of the communist nomenclature.

Local politicians, for the most part, did not support privatizstion because they saw it as a threat to their political-economic power, given that state-owned enterprises were essentially political party-owned enterprises.

Their aim was, therefore, to delay and postpone privatisation, and the international community remained the only driving force behind it. When privatisation was to take place, the political parties tried to ensure the companies ended up in their hands, or in the hands of their sympathisers.

Taking into account the absence of the institutional framework and the ethnic-political struggle that pervaded the economy, the result of privatisation was very unfortunate.

Three major issues shaped the privatisation process: (1) political obstruction – political parties tried to slow down the process, while corporate leadership tied to political elites did what they could to reduce the companys’ book values, because they could then be more easily privatized by members of the relevant ethnic group. (2) Non-transparency – non-transparent processes accompanied by corruption scandals and clientelism. (3) Ethnicisation of the process – privatised enterprises ended up in the hands of members of the “right” nationality and continued to support political parties and their activities financially.

Foreign investors came with political goals:

Milorad Dodik in Sarajevo, Bosnia and Herzegovina, 2018. Photo: EPA-EFE/FEHIM DEMIR

In 2000, the international community created a list of 140 “strategic large enterprises” – 87 from the Federation entity and 53 from the Republika Srpska – which were supposed to be privatised.

The main focus was given to companies producing and supplying electricity and water, telecommunications and transport companies, mines and so on.

Structural reforms and laws on foreign direct investments were adopted to attract foreign investors. However, this approach did not prevent controversies and the above-mentioned negative aspects – political obstruction, non-transparency and especially ethnicisation.

Although there were successful cases of privatisation by foreign investments, the foreign investors often used the opportunity of privatisation to gain more influence in the country and strengthen their political ties.

The three examples described below reveal the controversies surrounding foreign investors’ role in privatisation – be it USAID’s mismanagement, leading to ethnicization and failed privatisation, or Russian and Turkish capital, aiming to strengthen these countries’ positions in Bosnia and establish close ties to the Serbian and Bosniak leaderships respectively.

The failed privatisation of the giant aluminium producer Alumnij Mostar in 2008 is an illustrative case of controversial USAID assistance. At first, a USAID-assigned international consultant miraculously reduced the company’s market value from 620 million US dollars to 84 million.

Furthermore, members of the winning consortium, Glencore-Feal and Dalekovod Zagreb, were exclusively Croatians connected to the ruling HDZ party in Croatia and its wing in Bosnia, HDZ BiH, thus manifesting the clear ethnicisation and politicisation of the privatisation process.

On top of that, in 2010, the privatisation was declared unsuccessful. Today, 44 per cent of the company is still owned by the Federation entity, 44 per cent belongs to small shareholders and the government of Croatia owns the last 12 per cent.

The company is heavily indebted, and according to the current director, the key to restoration is yet another privatisation. The company is supposed to be privatised by 2020; the new investor could be the electric utility company Elektroprivreda HZHB which is also its biggest creditor.

In recent years, speculation emerged that Russian investors pushed by the former Croatian member of Bosnian presidency Dragan Covic, might be interested in the privatisation. These rumours faded after Covic was not reelected to the Bosnian state presidency in 2018.

Following primarily political logic and aims, Russian capital has played a major role in privatisation in the Bosnia’s mainly Serbian entity, Republica Srpska, where the oil refineries in Modrica, Bosanski Brod and Banja Luka are the biggest Russian investments.

The refineries were sold for 121 million euros to a Russian company Nefgazinkor, which is 100 per cent owned by the Russian state company Zarubezhneft.

Under the privatisation plan, the investor was supposed to pay the debts of all three refineries. However, this burden was then assumed by the RS government. The obligation of the new owner was also to invest in the development of the companies. However, the Russians merely provided loans to all three companies and further indebted them.

Nevertheless, Milorad Dodik, the former president of the Republica Srpska, called the privatisation a “great help of Russian brothers to the Serbian nation”.

There is no doubt that the side aim of the Russian investment was to strengthen Russia’s ties to the ruling party in the RS, Dodik’s SNSD.

Whereas Russian investors play a significant role in the RS, the mainly Muslim and Croat Federation attracts Turkish capital among others. The biggest Turkish investment in Bosnia came in 2005 when the Turkish Holding Hayat privatised the paper and cellulose producer Natron in Maglaj. The firm employs about 900 workers and seems to be one of the rare good stories of privatization.

But a more detailed look at Turkish activity in Bosnia shows that Turkey aims to play a more active role in the country, especially through control of the banking sector. In 2018, Turkey became the second largest investor in this after Austria. Although Turkey declares its friendship with Bosnia, in particular with the main Bosniak party, the SDA, Turkey is not even among the ten largest foreign investors overall. As a regional power, therefore, Turkey has its interests in the Western Balkans, but political support for Bosnia prevails over its investments, so far.

To sum up, the main driving force behind the privatization process in Bosnia was the international community, represented primarily by the USAID. Although privatisation of the state-owned enterprises was supposed to be transparent and fast, the international community did not prevent political obstructions, clientelism and ethnicisation.

The desire to attract foreign investment resulted in suspicious and clientelist businesses that strengthened the influence of foreign countries rather than boosted the Bosnian economy, although in some cases, like Natron Hayat, privatisation was successful.

Foreign investment has, therefore, been both an opportunity and a threat to today’s Bosnia and Herzegovina. As the cases mentioned illustrate, political motives and struggle for influence in the country have often gone hand in hand with economic activity.

This article was written as part of the project ‘Western Balkans at the Crossroads: Assessing Non-Democratic External Influence Activities,’ led by the Prague Security Studies Institute. For more information, visit: www.balkancrossroads.com.

The opinions expressed in the comments section are those of the authors only and do not necessarily reflect the views of BIRN.